Why Is Alimony No Longer Tax Deductible?
Learn why federal tax rules for alimony changed. Understand current implications for support payments between former spouses.
Alimony, a financial arrangement often established during divorce or legal separation, has seen significant changes in its federal tax treatment. Historically, these payments carried certain tax implications for both the payer and the recipient. This article will explore the present tax landscape for alimony, the legislative shift that brought about these changes, the specific criteria for payments to qualify as alimony, and how other common payments between spouses are treated for tax purposes.
Current Tax Treatment of Alimony
Federal tax law now treats alimony payments differently than in previous years. For any divorce or separation instrument executed after December 31, 2018, the individual making the alimony payments cannot deduct these amounts from their gross income. Correspondingly, the individual receiving alimony under such agreements does not include these payments in their gross income for federal tax purposes.
The Legislative Change
Before recent legislative changes, alimony payments were generally deductible by the payer and considered taxable income for the recipient. This tax treatment often allowed for a shifting of income from a higher-earning spouse to a lower-earning one, potentially resulting in a lower overall tax burden for the divorcing couple. This structure was a common consideration in divorce settlements.
A fundamental alteration to this tax treatment occurred with the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. For divorce or separation instruments executed after December 31, 2018, the TCJA eliminated the deduction for alimony payments for the payer and removed the requirement for the recipient to include these payments as taxable income.
The rationale behind this shift included simplifying the tax code and removing what some viewed as a federal subsidy for alimony. This change meant that the income used for alimony payments remains taxable to the payer, effectively treating the transfer as if the marriage had remained intact for tax purposes.
Divorce or separation instruments executed on or before December 31, 2018, generally continue to operate under the old tax rules. This means the payer can still deduct the alimony, and the recipient must report it as taxable income.
What Qualifies as Alimony for Tax Purposes
Regardless of its tax treatment, for a payment to be considered “alimony or separate maintenance” under federal tax law, it must satisfy specific criteria established by the Internal Revenue Service (IRS). These conditions ensure that only certain types of payments between former spouses are categorized as alimony. The payment must be made in cash, which includes checks or money orders.
The payment must be received by or on behalf of a spouse or former spouse and made under a formal divorce or separation instrument. This instrument can be a divorce decree, a separate maintenance decree, or a written separation agreement. The divorce or separation instrument cannot designate the payment as not includible in the recipient’s gross income and not deductible by the payer.
The payer and recipient cannot be members of the same household when the payment is made, particularly if they are legally separated under a decree of divorce or separate maintenance. There must also be no liability to make any payment, whether in cash or property, after the death of the recipient spouse. Finally, the payment must not be treated as child support or a property settlement.
Other Payments Between Spouses
Not all financial transfers between spouses during or after a divorce are considered alimony for tax purposes. Other types of payments carry distinct tax implications. Child support payments, for instance, are treated differently from alimony under federal tax law.
Child support is never deductible by the payer and is never considered taxable income for the recipient. If a divorce or separation instrument provides for both alimony and child support, and the payer remits less than the total required amount, the payments are first applied to child support obligations. Only any remaining amount can then be considered alimony.
Payments made as part of a property settlement or division of assets are also treated differently. Transfers of property between spouses or former spouses incident to divorce are generally not taxable events at the time of the transfer. This means neither spouse typically recognizes a gain or loss on the transfer of assets like a home, investments, or other property as part of the divorce settlement.
Informal or voluntary payments that are not required by a divorce or separation instrument generally do not qualify as alimony for federal tax purposes. These payments lack the formal structure and legal obligation necessary to meet the IRS criteria for alimony, and therefore, they do not receive the same tax treatment.